Thinking of investing in muni bond fund, but in low tax bracket, worthwhile?

[joecan5785]

I am 61 yrs old, retired, no pension, plan on applying for SS at 67. Since I want to increase my bond allocation and I cannot put anymore in my tax deferred accounts, I will have to add bond fund(s) to my taxable account. I live in Mass and was thinking of buying VMATX (Vanguard MA Tax Exempt) The 30 day SEC yield is 2.80% which translates to a tax equivalent yield of 3.353%. My federal rate is 12% and state, 5.1%

I know that muni funds are ususally best for high tax bracket investors but when I compare VMATX to two other funds I was considering, VMATX is higher. The other funds were VSIGX (Vanguard Intermediate Term Treasury) 30 day yield of 2.52% and VTABX (Vanguard Total International Bond Index) 30 day yield of .93% So, wouldn't muni fund make sense in this instance?

With my dividend income at present, I am not paying any federal tax. I do have 3-4 years expenses in CD's, savings account, etc. to ride out market corrections. Looking for advice as to what are my best bond fund options.

Thanks

 

[pb4uski]

What is your equities allocation? One thing to consider is to put international and domestic equities in your taxable account and then sell any equities in your tax-deferred accounts and buy more bonds in your tax-deferred accounts. If you are in the 12% tax bracket then qualified dividends and long-term capital gains are taxed at 0% (federal) and for international equities you get to use the foreign tax credit, which goes to waste in a tax-deferred or tax free account.

Last year, my foreign tax credit was about 3 1/2 times my non-qualified dividend income, so for my international equities my effective tax rate was actually negative... my tax credit exceeded the tax on non-qualified dividends.

 

[joecan5785]

pb4uski,

I do have international and domestic equities in my taxable accounts and a reit in tax deferred. Also in tax deferred, I have a corporate bond fund, a mortgage bond fund and emerging market bond fund. Now I am looking at taxable. My equities allocation is 50%

 

[gwraigty]

Among the funds you're comparing, yes, it would make sense.

 

[LiveBelowMeans]

Check out JPC, Nuveen preferred stock fund. Pays about 8%. Or you could look at PMF, pimco’s municipal bond fund, pays over 5%. Jmho

 

[COcheesehead]

Check out JPC, Nuveen preferred stock fund. Pays about 8%. Or you could look at PMF, pimco’s municipal bond fund, pays over 5%. Jmho

The Pimco fund is a closed end fund. Just be careful. It has a negative 3 year return. Anything with that kind of tax free yield, has an inordinate amount of risk.

 

[gerntz]

If bonds in taxable account is the right thing to do, agree on your choice. I actually use a mix of state bond funds & actual muni bonds.

 

[flipflop]

I'm in a low tax bracket, but I keep my emergency fund in VWAHX. Reason being that the volatility is a lot less in municipals for the return.



So far it hasn't been overly interest rate sensitive, and even went up in share price the day after a few rate increases. The high yield comes from a shorter holding period rather than bottom of the barrel bonds by the rating %'s, that most of the direct comparisons in the high yield market would show.



I chose not to pursue the double tax free of a specific state, just to let the managers have a wider scope to buy better quality.

 

[COcheesehead]

I'm in a low tax bracket, but I keep my emergency fund in VWAHX. Reason being that the volatility is a lot less in municipals for the return.



So far it hasn't been overly interest rate sensitive, and even went up in share price the day after a few rate increases. The high yield comes from a shorter holding period rather than bottom of the barrel bonds by the rating %'s, that most of the direct comparisons in the high yield market would show.



I chose not to pursue the double tax free of a specific state, just to let the managers have a wider scope to buy better quality.

Just the opposite would be true. Shorter durations = lower yield. The fund has about a 7 year average duration, so the yield comes from holding longer maturity bonds.

 

[flipflop]

I'd go look at the medium and long term municipal holdings, and study the statement from that light.


I don't have a dog in the race when it comes to VWAHX, just that for what it is Vanguard has done a good job with that one fund compared to the competitors high yield offerings. Edit: When it comes to the percentage of holding that are BBB and higher.


Cheers